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Edited version of private advice
Authorisation Number: 1012630393025
Ruling
Subject: Trusts
Question 1
Are you absolutely entitled for the purpose of section 106-50 of the Income Tax Assessment Act 1997 (ITAA 1997) to the share in a private company held by a relative?
Answer:
Yes.
Question 2
Will the transfer of the share to you trigger CGT event A1 in section 104-10 of the ITAA 1997?
Answer:
No.
This ruling applies for the following period:
Year ending 30 June 2014
The scheme commences on:
1 July 2013
Relevant facts and circumstances
In a prior year, you and a relative each acquired an ordinary share in a private company for a nominal amount.
The relative acquired his/her share at your request solely to comply with the Corporations Law in place at the time that required private companies have a minimum of two different shareholders. You provided the consideration for the relative's share.
Despite the understanding between you and the relative that he/she would hold his/her share on trust for you, the company's original return indicated that the relative was the beneficial owner of his/her share.
During a subsequent year, the company advised ASIC that the relative was not the beneficial owner of the share held by him/her and asked that the company records be amended accordingly.
Accompanying this request was a statutory declaration by the relative to the effect that the share was acquired only because of the Corporations Law requirements that there be two shareholders; were it not for this requirement you would have acquired both shares; he/she holds his/her share as 'bare trustee or mere nominee for and on behalf of' you; you have always been the beneficial owner of the share; and there had been an error in the company's original Annual Return.
It is now proposed that the relative transfer his/her share to you.
The company acts in two different capacities. First, it is the trustee of a family trust through which a business is conducted. Second, it is a beneficiary of the family trust and has in that capacity been made entitled to income of the trust.
The relative has never had any involvement with the business conducted by the family trust and has never received a trust distribution. Nor has the company ever paid a dividend. Therefore, the relative has never derived a personal benefit from the shareholding.
Relevant legislative provisions
Income Tax Assessment Act 1997 - section 104-10
Income Tax Assessment Act 1997 - section 106-50
Reasons for decision
On the basis of the information provided (particularly the statutory declaration provided to ASIC), the Commissioner accepts that a trust arose when the relative acquired the share. The terms of the trust included that he/she would hold the share for your benefit and would deal with the share, and his/her rights as shareholder, as and how you directed and not otherwise.
Are you absolutely entitled as against the relative to the share he/she holds as trustee?
A beneficiary of a trust who is absolutely entitled to a CGT asset of the trust as against the trustee is treated as the owner of the asset for CGT purposes (rather than the trustee). Further, any act done in relation to the asset by the trustee is taken to be done by the beneficiary. See section
106-50 of the ITAA 1997.
Draft Taxation Ruling TR 2004/D25 sets out the Commissioner's views as to the circumstances in which a beneficiary of a trust is considered to be absolutely entitled to a trust asset for CGT purposes. It provides that the core principle underpinning the concept of absolute entitlement is the ability of a beneficiary, who has a vested and indefeasible interest in an entire trust asset, to call for the asset to be transferred to them or to be transferred at their direction. Your circumstances come within the terms of this Ruling.
Since it was published, cases have raised other issues not considered by it. For example, in Kafataris v. Deputy Commissioner of Taxation [2008] FCA 154 the Court indicated that a trustee power of sale in respect of a trust asset might prevent a beneficiary from being absolutely entitled to the asset. The Commissioner indicated in his Decision Impact Statement for that case that this conclusion is not inconsistent with the Draft Ruling.
However, the nature of the trust in this case meant that the relative was required to deal with the share only at your direction. In those circumstances, you are considered to be absolutely entitled to the share.
Will the transfer of the share to you trigger a CGT event?
Because you are taken for CGT purposes (by virtue of section 106-50) to be the owner of the share that a relative holds as trustee, there will be no change of ownership when it is transferred to you.
Accordingly, CGT event A1 will not happen when the share is transferred to you.